Jeff Saut continues to think the current dip should be bought heading into year-end. Yesterday’s action in the transports following Buffett’s purchase of BNI will certainly confirm Saut’s belief that we did not and will not get a Dow Theory sell signal. After the near Dow Theory sell signal Saut was quick to quote Russell, who has been quite cautious of late:
The secret of the direction of the great primary trend of the market lies in the secondary reaction and what happens AFTER a secondary reaction. A secondary reaction usually takes three weeks to three months in duration while correcting one-third to two-thirds of the previous move. Since the March low, we have yet to experience a true secondary reaction. And I’m wondering whether we could be on the edge of a secondary reaction now. Following a secondary (reaction), if BOTH Averages (Industrials and Transports) rise to new highs, the primary trend is taken to be bullish. Following the lows of a secondary reaction, there will be a rally. If (that) rally fails to take both Averages to new highs, and the Averages then turn down and break to new (reaction) lows, the primary trend is taken to be as bearish. Secondary reactions often start with one of the Averages sinking while the other Average continues to the upside.
With that said, Saut maintains his bullish view based on the idea that money managers will be forced to continue playing catch-up into year-end. Saut is unfazed by the recent downturn in stocks and believes the most investors have been hoping for such an opportunity:
last week’s “wilt” left everything we follow lower except for the U.S. Dollar Index. And while the DJIA (9712.73) averted a loss in October, none of the other indices we monitor did. Indeed, the S&P 500 (SPX/1036.19) slid 3.9%, bringing its two-week retreat to 5.6%. While our sense is that we are into a secondary correction, our proprietary overbought/oversold indicator is VERY oversold and the number of S&P 500 stocks that are above their 50-DMAs has fallen from more than 90% to 33.2%. Consequently, we continue to think it is a mistake to get too bearish. Ergo, until Dow Theory “tells us” otherwise, we think the primary trend remains UP, and we continue to trade, and invest, accordingly.
Saut is not alone in his sentiment. In fact, there appears to be a growing consensus that the rally will continue into the end of the year for none of the right reasons. In other words, the rally is expected to continue as investors fight to get to the top of the molehill. But be careful, as Saut says, there is also a growing consensus that 2010 will be a potentially treacherous year for investors.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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